The trade-off between catching the move and being stopped-out. $study

-Very interesting blog note from Mike Bellafiore at SMB Capital. http://www.smbtraining.com/blog/the-direction-and-the-pattern . Basically , for an intra-day trader you must not only know the direction but also how the stock gets there, (basically will the pullbacks be shallow or deep) or else you run the risk of being right but being stopped out.

- What I take from it is: be patient...wait for the pullback or consolidation to determine your stops/breakout levels. The fundamental question is there is a trade-off between catching all of the move and being stopped out, and one has to decide how and where on that tradeoff line one wants to trade. Waiting for a pullback will give you a sounder stop, but the wait will mean you will miss some of the move. Conversely if you go in early you might be handsomely rewarded, but the risk of being stopped out increases.

-Not sure how clearly I am explaining this, but I think it is very crucial for an intra-day trader to be aware of  this tradeoff...I will try to follow with examples/charts in a post over the weekend....

Patience! Wait for it! Mel Gibson "HOLD!" "HOLD!" $bbd $spy $study

-I made an excellent trade...but I lost money in it! I went short $BBD against $SPY as shown in the chart...but it was too early...literally. I established the position between 11.45 and 14.45 . Now I know these type of trades and Brazilian ADRs in particular work best if established late in the day or early next morning...or put another way, the outperfomance usually lasts for at least a day . I had had some good trades and was too confident and anxious to "get some more".

- I was forced to cover the next morning (dollar limit stop loss) as shown in the chart. Had I been more patient when entering the position I would have been able to exit later in the day at a nice profit.

- The lesson , which I should know by now, is best illustrated by Mel Gibson in Braveheart. As the English cavalry attacks he shouts "Hold ! Hold!" (as shown in the video at 1 minute 23 seconds) right until the last moment .



If you like to link trading lessond to films, here is another I did a while ago :on stop losses and Peter Sellers in the film "The Party" .http://jpotrading.blogspot.com/2010/09/link-between-not-using-stop-losses-and.html

A Tale of Two Pullbacks: $LO $INTU $study

-Both $LO and $INTU gapped up today. A common trade is to buy the pullback that inevitably occurs. This worked for $LO but clearly not for $INTU as shown in the charts. Both made clear pullback bases from which one can put a low risk stop, but one worked and the other failed.

-In fact $INTU made it back to the opening price which is very suspicious and probably indicates it has further to fall today.

When in Doubt, Pair Trade. $JPM $WFC $COF $CAT

These volatile last couple of days I have been mostly pair trading. The saying "you have to trade in accordance with your personality" applies here. I do not feel strongly about being long or short here...I cannot predict earthquakes or nuclear developments.

-Above is a chart of my long $jpm short $wfc trades. Other pairs I have been trading are short $wfc against $spy; short $cat against $spy;short $cof  against $jpm ; short $bbby against $spy .

Relative Strength by Joe Fahmy

Interesting lecture on Relative strength by Joe Fahmy.

Short Weak Stocks; Part 2 - Absolute and Relative Weakness $study $akam $klac $spy

In the last post I mentioned the need to short weak stocks rather than strong ones. However maybe I should have said that the really important point is to short relative weakness. Let me clarify with two trades I took yesterday.

-AKAM was basically a weak stock yesterday. It underperformed the SP500 in absolute terms.  However what really made me short it was its behaviour around 14:40 where it began to exhibit pronounced RELATIVE WEAKNESS....the SP500 was making new highs and AKAM was popping up in my daily low screen. So here we have a stock that through its ABSOLUTE WEAKNESS indicated it would be a good intraday short, and that through its RELATIVE WEAKNESS confirmed and triggered my trade.

                                         

-KLAC on the other hand was a very strong stock yesterday...it exhibited clear ABSOLUTE STRENGTH. I was tempted to short it but waited for RELATIVE WEAKNESS to manifest itself, which it did from around 14:00 onwards.

Basically paying attetion to the relative perfomance will give you a hint that its ok to put on a short by showing that a weak stock is not simply establishing the low of a range, and that a strong stock is not simply making a pullback before going higher again.

Short Weak Acting Stocks. $akam $adtn $cree $study

If you are going to short a stock, choose one that shows  weakness during the course of the day. Below are the graphs of three I traded to the short side profitably today.

-What they all have in common is that they start exhibiting relative weakness from the start. On a strong up-trending day they kept making new intra day lows. So again and for my benefit SHORT WEAK ACTING STOCKS NOT THOSE THAT ARE ACTING WELL!.

The Story of Three Gaps. $SLB $GE $MCD ; $study

-SLB posted ok results friday pre-market. The stock gapped up over 2% but did not take out recent highs at 87.70...the opening drive high was 87.56 . The first fifteen minute candle was long and red and took the stock close to unchanged. This all hinted this stock was not going higher today. I waited for a bounce and shorted as shown in the chart.
-I should have shorted a little later, when the stock was falling rather than going up, and thus a clearer pattern established.
-Exit was poor, but I just was desperate to lock in some gains.

-Compare SLB with how GE, which also reported results, behaved. It opened up 4% clearly above recent highs; the first fifteen minute candle was green and never violated to the downside. So whereas the SLB opening hinted "I want to go down" , the opening in GE hinted "I want to go up" .

-Another interesting comparison is MCD which reported yesterday. Its fisrt two hours are almost an exact mirror image of what happened to SLB.
-MCD opened down, but had a nice initial green fifteen minute candle. It then reached unchanged; pulled back; and proceeded in the direction of the initial 15 minute candle.

The Opening Behaviour Gives Clues Again; Gap Direction and Initial 15 minute Range. $AAPL $GS $study

-I have blogged before about the importance of the opening level/behaviour. http://jpotrading.blogspot.com/2010/12/importance-of-opening-level-in-gaps-ccl.html

-Two days ago AAPL had what were apparently stellar results (again), and multiple upgrades. But it was only trading between up 0% and up 3% in pre-market...not impressive. Obviously the great results were competing with the opposing force of Steve Job´s medical leave.

-The stock opened at the pre-medical leave highs and quickly went down. This was a strong clue to the question of whether AAPL  was going up 5% due to results or down due to the medical leave.
- The pullback off the early lows was also instructive...its high coincided almost exactly with the previous day´s high...once this failed...

-GS had results that were not impressive, but far from dismal. It gapped down and the question was now what? It was range bound by the initial 15 minute candle , and one could trade this, but the "real trade" came with the brake of the opening 15 minute candle...and appropriatly the brake came in the direction of the initial gap down.

Levels For Stocks in Play Friday $KLAC $AMAT $NVLS $LRCX $ARMH $ERJ

KLAC

                                                                           AMAT

NVLS

LRCX

ARMH

ERJ

Good Trades Have a Logical Story Line. Overnight Positions Have Missing Chapters. $SPY $ADSK $study

-I had a number of reasonable trades yesterday. The common theme was I could explain the reason for the trade in a logical manner, a "good story", and hopefully the market would agree with the ending I had in mind.

-For example the following $ADSK trade. Citi had downgraded the stock( http://finance.yahoo.com/news/A-60Second-Guide-To-What-siliconalley-2380963544.html?x=0&.v=2 )and it opened down more than 2%. It recovered valiantly to the point that I thought it was too much. I shorted at 40.71 with a stop at 41.02 . My "story line" played out fine. It would be invalidated should ADSK trade over 41.02 .
-Importantly if my story was wrong I would just stop reading it or leave the cinema at my stop level.

-The problem with overnight trades is you cannot tell a good story because ...there will be missing chapters. The story takes on a plot out of your control. You cannot leave the cinema till it is too late. I came in short SPY ( http://jpotrading.blogspot.com/2011/01/yesterdays-trades-spy-de-bidu.html )and by the morning the market had a written a couple of chapters that left me with a loss. End of story; I either liked it or not.

-So no overnight trades please. You have no edge.

Yesterday´s Trades: $SPY $DE $BIDU

-I entered the day short $SPY. There was a bizarre downdraft at 13:09 that gave me a chance to cover, but I thought it signified more weakness to come and did not. Still in the position and not looking to good this morning with futures up.

-DE opened with a break out. I traded it as shown in the chart above. Basic premise was that a significant breakout would not occur.

-BIDU had a weird drop which called my attention. This was well before the 13:09 general market drop.
-I covered when it started behaving relatively strong in relation to the market. My thesis was that something was up when the drop occurred....but if this was so it would have dropped much more significantly when the market kind of collapsed later. My reason for the trade was invalidated and thus I covered.

Yesterday´s trades : $ADBE $BAC $SPY

-ADBE was upgraded before the open by Merril Lynch. I felt the initial pop up did not have much energy to it and shorted it at 32.46 with a stop at 32.55 just above the opening drive high of 32.54 .

-I traded BAC from the long side since it was showing relative strenghth to other banks and to the market in general. Yet , despite being "right" I lost money.

-The irony is that I closed the second try flat because I felt the market was going down if anywhere. I not only closed the BAC long but went short SPY as well as shown below. Would have done much better just holding the BAC long.

- Asian and European market weakness and Friday´s late ramp biased me to trade the SP500 with a short bias. But price action rules , and my first short was stopped out just above the intra-day high as shown in the chart.
- I re-entered via a stop-short sale at 126.88 with a stop at 127.02 . I removed this stop and was looking ok in the after-market as SPY traded around 126.90 . Pre-market action this morning has popped it to 127.50 and I still do not know what I will do.

$ADSK $AMZN $DE $FCX $LLL . Not a Good Day.

-Bought at 41.43 (9:56) on the breakout. Sp500 also seemed favourable with slight uptick. Stop triggered 40.98 (10:51).

-Thoughts. The entry was OK; a fair bet on the breakout. I failed on the stop. If it was going to breakout, a 20 cent stop would be sufficient. I put the stop at 40.98...1% move in the stock price. Not justified. Clean breaking out stocks do not re-trace 1% after insignificant moves.

-Another trade I did trying to ride a breakout was AMZN. Recent high was 187.71, and I bought at 188.29 (10:16). I set my stop at the day´s low at 187.05 , and this was triggered at 10:53 .

-Thoughts : the stop was well placed at the previous low for the day; 0.64% from your entry. The stock started falling exactly when the SP500 did at 10:36 . Just a cost of business loss.

-DE was another breakout trade...and it also failed. It  started falling at 10:36 with the market.

-Three trades , three losses...I was going to have my breakout trade! Instead of relaxing/going for a walk I persisted . This wrong mindset led me to a trade I normally would not take. I went long FCX just because it was showing some relative strength, and put a dollar size stop . The 117.45 line I show in the chart I was not even aware of at the time of the trade. Horrible trade; no method.

-I also managed to screw up two trades in LLL but too tired to write them up now. Funnily enough this one did truly break out!

$MSFT $NVDA . "Work needed on exits." Repeat 1000 times.

- The $DIS trade I blogged about yesterday ended well as I covered at 39.52 (30 cent gain)http://jpotrading.blogspot.com/2011/01/dis-do-your-homework.html

- More importantly I took to heart my own advise of looking for "easier" breakout trades. At 14.00 I wrote in my journal "time to look for pops" and this led to successful trades in $MSFT and $NVDA .

- So, looking for strong stocks I bought $MSFT 28.56 (14:09) and sold it 28.65 (14.49).

- Thoughts: Well done for the effort...totally unnatural for me to do these momentum trades. (Gotta do more) . Horrible exit. There was no reason to exit the trade when I did. I wrote in my blog "market falling and making me nervous" . Well the correct thing would have been a trailing stop at or slightly above my entry.

-My quest for "poppers" then led me to$NVDA. My shorting instincts almost got the better of me at the point shown in the chart.

-Thankfully I did not and went long as shown in the chart. Also set the stop to my entry point and therefore did not get shaken out when it pulled back....but could not resist selling at 19.09 . Bad move...look at all the money I left on the table...and again a reasonable stop would have kept me in the trade.

-This problem with my exits is recurring . Had the same problem with $RL and SBUX and $BBBY earlier in the week . http://jpotrading.blogspot.com/2011/01/rl-work-needed-on-your-exit-points.html

$DIS Do your homework!

- On Tuesday DIS broke out impressively. I refrained from shorting it ; it ended the day at 39.00 .
Then in after-hours bids showed up at 39.30 and i could not stop myself from shorting some.

- The yesterday morning the reason for the after-hour strength became clear ; Goldman was putting DIS in the buy conviction list. Fortunatly the pre- ADP number market was weak abnd I covered at 39.14 . I reckoned the Goldman upgrade meant it could easily outperform the market by around 2%.

- As it climbed up during the day I thought that with the breakout on tuesday and Goldman´s upgrade a lot of good news was out and started shorting throughout the day. Average price 39.81 and holding.

-Thoughts: I might make money or not in this trade. But looking at the chart it is obvious I missed the easy trade...which was to go long the breakout. Reason i did not is by the time it caught my eye it was up 2 or 3%  already. This means I DID NOT DO MY HOMEWORK. Always have a list of stocks which have the potential for breaking out due to being close to monthly/weekly highs and put them in your watchlist. DO YOUR HOMEWORK.

$APC Break even. Good Risk Management.

- APC started off well enough as per my thesis for entering the trade yesterday http://jpotrading.blogspot.com/2011/01/apc-second-chance-at-shorting-study.html .

-So much so that as it fell further I shorted some more at 74.66 (9:55) .

-But it was not meant to be and general market recovery and a pop in oil meant my stop was trigerred at 75.42 just above what had been the day´s high.

-Thoughts: good risk management. It was painfull to see the profits evaporate and tempting to give it more room, but my thesis from yesterday was it should tank , and  by taking out the day´s high in mid morning iy invalidated my "thesis".

$APC A second chance at shorting. $study

-Yesterday I was stopped out of my short only to see $APC fall significantly from my stop level and close near its lows http://jpotrading.blogspot.com/2011/01/apc-to-be-or-not-to-be-taken-over-study.html .

-Last thing I said on yesterday´s post was "Re-visit tomorrow", but as it collapsed further from the start so I thought it was over; this one had gotten away.

-Alas it came roaring back at the end of day and allowed me a shorting opportunity at 75.95 (15:40)

$BIDU Stopped Out $study

- Entered the day short $BIDU as per yesterday´s blog entry:  http://jpotrading.blogspot.com/2011/01/bidu-not-good-tradefor-now-study.html
-Put in a buy-stop at 100.52 and it was quickly triggered at 9:31 for a loss.

-Thoughts: Will wait to see if it fails test of the 20 SMA and recent highs at 102.00. Also, this 50 billion facebook valuation might be helping  all things internet.